Friday, April 29, 2011

When Canadian international forward Simeon Jackson struck the last-gasp winner for Norwich City against Derby County last weekend, it was incredibly the 12th goal that the Canaries had scored in the 90th minute or later this season. This is a sign of a team that never knows when it is beaten and this resilience is just one of the reasons for Norwich’s impressive surge to a highly commendable second place in the Championship. Paul Lambert’s team stand on the threshold of the Premier League, which would mean a second successive promotion and represents a remarkable turnaround in the club’s fortunes.

At the beginning of last season, Norwich played their first match in the third tier of English football for 50 years and were on the wrong end of a 7-1 hammering by the mighty Colchester United. This humiliation in front of their devoted Carrow Road fans resulted in the sacking of the manager Bryan Gunn, the popular former goalkeeper, but it’s an ill wind that blows no good, as Norwich then secured the services of the manager responsible for that spectacular defeat, a certain Paul Lambert.

A Champions League winner with Borussia Dortmund, Lambert was unlikely to be fazed by the task facing him, but even he might be a touch surprised by the magnitude of the transformation. Despite the awful start, Lambert led Norwich to the League One title and promotion back to the Championship, with prolific striker Grant Holt and attacking midfielder Wes Hoolahan thriving under his guidance. This duo have continued their fine form in the higher division, scoring 30 goals between them and being named in the PFA Championship team of the season.

"Grant Holt - the only way is up"

Norwich’s progress is all the more noteworthy when you consider that it has been achieved without bringing in a raft of big names. Indeed, the most well known of last summer’s signings were probably Andrew Surman, who only played a handful of games for Wolves in the Premier League, and Elliott Ward from Coventry City, who was loaned to Doncaster and Preston last season. Nevertheless, they have shone for Norwich, while other unheralded arrivals have also made notable contributions, including the battling Welsh midfielder Andrew Crofts, snapped up from Brighton, and John Ruddy, a goalkeeper plucked from Everton’s reserves.

The excitement at Norwich’s possible return to the top tier is a major improvement on the Norfolk club’s recent history. The last time they were in the Premier League was 2004/05, when they survived just a solitary season, before relegation back to the Championship where they languished for four miserable years prior to their demotion to League One. This period was marked by a series of poor managerial appointments with three managers (Peter Grant, Glenn Roeder and Gunn) lasting less than three years between them. This managerial merry-go-round was nothing new for Norwich, as they had employed no fewer than nine managers after the current owners took over in 1996.

This was all a far cry from the early 90s, when Norwich City were very much a force to be reckoned with. In fact, they were founder members of the Premier League, actually leading the table for much of the inaugural 1992/93 season before being over-taken by Manchester United and Aston Villa in the final furlong. During this golden age, they also memorably defeated Bayern Munich in the UEFA Cup with a spectacular goal from Jeremy Goss in the Olympic Stadium forever emblazoned in the consciousness of Norwich supporters everywhere.

"Jeremy Goss - that goal, that shirt"

However, these successes masked the growing financial problems at Norwich, which were only kept at bay by former chairman Robert Chase selling the club’s best players like Chris Sutton and Ruel Fox, a policy that adversely impacted performance on the pitch and provoked Martin O’Neill to resign after just six months as manager. Following fans’ protests against the player sales, Chase stepped down in 1996, leaving the club with large debts of £7 million. Many years later in the 2008 accounts, the club described the situation back then as “virtual disintegration.”

Former chairman, Geoffrey Watling, stepped in again, buying out Chase, before selling the majority shareholding to current owners, well-known TV chef Delia Smith and her husband Michael Wynn Jones. There followed several years of stagnation in the old First Division (then the second tier), before promotion back up to the Premier League in 2003/04.

Although the single season at the highest level provided the club with some financial stability, it did little to ease Norwich’s long-term difficulties, as the board “chose to make considerable investment, both in team strengthening and in infrastructure.” Former chief executive Neil Doncaster cautioned, “It is a sobering thought that, despite the many millions of pounds of television money we received during our short stay in the Premiership, the club's overall cash position only improved by £0.7 million that season.”

"Delia - Let's be having you!"

In 2006 the accounts drily noted that the key task facing the executive management team was “to ensure that the club does not run out of cash”, which is not a phrase likely to inspire confidence. Last year, the message was more or less the same, though a little less abrupt, as one of the principal business risks was described as the club having “insufficient cash flow to meet its obligations for the 2010/11 season.”

Despite denials at the time, it is now evident that there was a strong risk of the club going out of business in January 2010 with chief executive David McNally warning, “Clearly the financial challenges that we’re having to face up to are real.” Indeed, at the 2011 Annual General Meeting, the chairman Alan Bowkett admitted, “We couldn’t afford to pay our interest and we couldn’t afford to pay the amortisation owing on the loans on time.” Norwich City could easily have fallen into administration if they had not managed to persuade the banks to temporarily suspend repayments of interest and capital.

The level of indebtedness remains the club’s biggest financial problem, even though it was reduced by £2 million in 2010 to £20.9 million. Although this may seem trivial compared to the astronomical debt owed by many leading clubs such as Manchester United, it is far from insignificant relative to Norwich’s revenue of £17 million, which is much diminished after many years outside the Premier League.

Most of the debt was incurred for stadium improvements, in particular the construction of the Jarrold Stand (at a cost of £6.5 million) and the Norwich Union Community Stand (£3.2 million), though it also covered the cost of new offices and land purchases around the stadium.

The £22.9 million net debt comprises loan notes £11.2 million, bank loans £3.5 million, other loans £6.3 million, preference shares £1.6 million and an overdraft £0.2 million less £1.8 million cash. The outstanding loan notes represent the unpaid element of a 15-year £15 million loan from AXA Investment Managers Ltd, which was released in two instalments of £7.5 million at fixed rates of 7.67% and 7.24%. In addition, there are two bank loans: £1.0 million with the Bank of Scotland repayable over 10 years at 2% above base rate; and £2.5 million repayable in 2012 at 4.25% above LIBOR.

The loan notes and bank loans are secured on land and future income streams, but the other loans of £6.3 million (from directors past and present) are unsecured and interest-free. This is just as well, because the annual interest on the loan notes and bank loans of £1.6 million is difficult for the club to cover from normal operations with the interest rates now looking quite high by today’s standards.

"Wes Hoolahan - when Irish eyes are smiling"

This helps to explain why the club was in breach of certain covenants at year-end with its principal lenders, AXA and the Bank of Scotland, which explains why the debt is show within creditors amounts falling due within one year, as is the £1.4 million owed to deputy chairman Michael Foulger, as this is repayable on the earlier of promotion to the Premier League or August 2012.

The worries over Norwich’s funding issues led to auditors Grant Thornton inserting the dreaded “Emphasis of Matter” statement in the delayed 2009 accounts, warning of “the existence of an uncertainty which may cast doubt about the company’s ability to continue as a going concern.” Although such comments do not necessarily sound a death knell to a club, they are obviously not good news, hence the importance of the agreement with the club’s lenders to defer payments. In fact, the rescheduling of debts was sufficient to remove this statement from the latest 2010 accounts.

This does not alter the fact that Norwich’s business model relies on regular injections of cash from its owners. Since Delia Smith and Michael Wynn Jones took over the club in 1996 they have put in around £12 million via share purchases and interest-free loans, which they have promised they will not ask to be repaid while the club still owes money to the banks. No wonder that former chairman Roger Munby said that “the club remains hugely indebted to their incredible generosity”, which enabled the Canaries to support a reasonable wage budget and prevent the sales of too many players.

However, they’re not the only benefactors, as fellow director Michael Foulger has also provided loans of £1.4 million and two months ago bought £2 million of new shares, increasing his stake in the club to 15% and reducing that of the Delia Smith and Michael Wynn Jones combination from 61% to 53%. This money has been ring-fenced to be used solely for the playing budget. Foulger also gifted the club £360,000 in the summer of 2009, when he matched pound-for-pound all the money not claimed by season ticket holders, who were entitled to a 20% rebate following relegation to League One.

Finally, Andrew and Sharon Turner loaned the club £2 million when they became directors in 2007, though their pledge to provide another £2 million of support unfortunately did not come to pass, as they left the board the following year for reasons unknown. The hole in the budget was closed by yet another contribution from “Smith and Jones.”

Over the last few years, the club has been living a hand to mouth existence, attempting to generate cash and balance its books with a variety of creative initiatives, such as refinancing, share offers and sales of property and land. A £1.5m share issue in 2004 helped bridge the gap left by the collapse of ITV Digital with £1 million coming from the fans and the other £500,000 from Delia and her husband.

"Andrew Crofts - the running man"

The £6 million received from selling land near Carrow Road for a housing development that year paid for the “calculated gamble” of signing three strikers (Darren Huckerby, Mathias Svensson and Leon McKenzie). Similarly, the £720,000 raised from the unclaimed season ticket rebates in 2009 allowed the purchase of Grant Holt, whose 24 goals were vital in gaining promotion from League One.

Most recently, the £2.1 million of funds received from the sale of some more land adjoining the stadium to a housing association in November 2010 were used to reduce the club’s borrowing. This was an important part of the financial restructuring agreed with the two main lenders that extended their repayment schedule: AXA’s hefty loan to May 2022; the Bank of Scotland’s £1.5 million overdraft facility to August 2011 and bank loans to October 2013. According to chairman Alan Bowkett, this move left “the long-term future of the club much more secure”, but he was less circumspect at the club’s AGM, admitting that without the rescheduling, “We would not be standing here today.”

There is little doubt that the new management team of Bowkett and chief executive David McNally, who arrived with a fine track record from his time at Fulham and Celtic, have wasted no time in addressing the club’s financial issues since their appointments in July 2009, following the resignations of Munby and Doncaster as a result of the disastrous drop to League One.

"Simeon Jackson - another hat-trick"

They have had to balance Norwich’s proud tradition of a club run for the community with the commercial needs of a modern football club, so that annual losses and debt levels can both be reduced, while keeping the squad competitive.

As an example, this means fine-tuning the ethos of “affordable family football” by raising ticket prices and reviewing the number of tickets sold on concessions (over 50%), as gate receipts have to be a key element of the club’s revenue, especially at this level. Such moves are never going to be universally popular, but fortunately for the new board most supporters understand that revenue growth is necessary to avoid less palatable alternatives, such as selling star players or the club ultimately ceasing to exist.

The new executives put together a seven-year plan to return to the top flight and become an established Premier League club, which originally included two years to get out of League One and three years consolidation in the Championship. McNally further explained, “We would then be promoted to the Premier League, allowing for immediate relegation and an immediate return. From that point we would continue to play our football in the Premier League.” This must have looked fairly optimistic to fans, but barely after the ink has dried on the new vision, they might have to rip it up and write another one, as the team is way ahead of schedule.

"John Ruddy - calm and collected"

This begs the question of whether it might actually be too soon for Norwich to be promoted to the Premier League, but as McNally pointed out, “There are 90 million reasons to make certain we are ready.” He is referring to the financial bonanza available, though it’s important to appreciate that the money does not arrive in one fell swoop. Even if a club finishes bottom of the Premier League, it earns around £40 million from the TV deal, but it is also in line for £48 million in parachute payments over the next four years (£16 million in each of the first two years, and £8 million in each of years three and four). On top of that, gate receipts and commercial income would certainly be higher, hence at least £90 million more revenue. To place that into context, that is more than five times Norwich’s current turnover of £17 million.

Such an enormous disparity explains why clubs are so desperate for promotion to the Premier League, even though the Championship is a successful league in its own right, boasting the fourth highest attendance in Europe with a total of more than 9.9 million fans ahead of Italy's Serie A (9.1 million) and France's Ligue 1 (7.6 million), though admittedly fewer matches are played in those divisions. The sad reality is that money talks and precious little of the Premier League’s wealth finds its way down the football pyramid. These days, Football League clubs cannot even rely on raising serious money from player sales, as the Premier League tends to buy from overseas or their own division.

Consequently, it is very tough for Championship clubs to break-even from operations, especially if they are carrying a wage bill that will enable them to challenge for promotion, which means that most Football League clubs almost inevitably make large losses. Therefore, they must rely on other forms of financial support. As Delia said, “Anyone outside the Premiership is going to struggle without billionaires and millionaires.”

Norwich City’s financials are no exception to this rule, showing losses in each of the last three years, ever since the parachute payments from their last stint in the Premier League came to an end. Although the 2010 loss of £5.8 million might not seem a huge amount, it is equivalent to 34% of revenue. The same percentage would produce a loss of almost £100 million at Manchester United – even more than the real thing.

In fairness, the club did very well to restrict the loss to just £0.8 million more than the one recorded the previous year in a higher league, especially as they had to cover £2.6 million of exceptional charges, including £0.6 million relating to Paul Lambert’s move from Colchester United (fines, compensation, legal fees), £0.5 million for a strategic review and £0.2 million to directors and senior executives for loss of office plus £1.3 million classified as staff costs (£0.9 million promotion bonus and £0.5 million players’ compromise agreements).

Profit on player sales was also quite low at £0.8 million, including £0.3 million appearance related fees for former players, but this has never been a big money spinner for Norwich with the highest profit in the last six years being the £6.2 million made in 2005/06, mainly from the sale of Dean Ashton to West Ham. Since then, very few players have brought in large sums, even though the club have sold internationals like Robert Green and Robert Earnshaw.

The price of relegation can be clearly seen in the decline in revenue over the years with turnover falling from £37 million in 2005 (Premier League) to £17 million in 2010 (League One). Most of this decrease is due to TV, as the central distribution dropped £12 million in 2006 following relegation to the Championship, though it was held up by £7m of parachute payments in 2006 and 2007, before falling off a cliff in 2008. This was obviously a bitter pill to swallow for the club, particularly as it accounted for approximately 30% of total revenue. Commercial revenue also took a hit as a direct result of relegation, but gate receipts have held up remarkably well, which is a tribute to the fans’ steadfast support.

Even though Norwich’s revenue has fallen so much, they still have the ninth highest revenue in the Championship, based on the 2009/10 accounts. Clearly, the three clubs that were in the Premier League last season (Portsmouth, Hull City and Burnley) have the highest revenue, while the next three teams in the “league table” (Middlesbrough, Reading and Derby County) had the benefit of parachute payments. Even so, as former chief executive Neil Doncaster said, “We are in a far better position than a lot of other clubs, because our season tickets sell out and activities off the pitch.”

This is even more relevant this season, as only four clubs are boosted by parachute payments: the three relegated last season and Middlesbrough. Given that both Portsmouth and Hull City have encountered steep financial difficulties, we now have a more level playing field than in the past, at least from a financial perspective, which helps explain why the division is so competitive.

That said, Burnley’s revenue of £45 million last year was significantly higher than Norwich’s £17 million, entirely due to the difference in broadcasting income (£34 million compared to £2 million). In fact, revenue from gate receipts and commercial activities was actually higher at Norwich, even though they were two divisions lower. Following relegation to the Championship, Burnley’s projected revenue will still be more than Norwich, purely due to the £16 million parachute payments, though the gap is much closer, because of the increase in Norwich’s TV revenue to £5.5 million.

This estimate is mainly derived from three payments given to all clubs in the Championship: the £2.47 million Football League distribution; £2.2 million solidarity payment from the Premier League (up from £1 million last season); and £0.5 million share of the parachute payments given to Newcastle and WBA, as they went straight back up to the top tier. In addition, I have included £0.3 million for cup runs and facility fees (each time a team is shown live is worth £100,000 to the home team, £10,000 to the away team).

Unfortunately, the new Football League three-year TV deal signed this month, which kicks off in the 2012/13 season, is £69 million lower than the current contract at £195 million, a reduction of 26%. As there was no interest from BBC, ITV or even ESPN, the only game in town was Sky, who could accordingly lower their bid. Given that most of the money is allocated to the Championship, this is where the impact will be most keenly felt – another reason, if one were required, to push as hard as possible for promotion.

Although Norwich listed a reduction in attendances as one of their principal business risks, there would appear to be little danger of this happening, given that crowds have remained at more or less the same levels whatever league the Canaries find themselves in. Little wonder that the club formally thanked the “passionate, loyal, local support who continue to demonstrate their undying loyalty to their football club.”

In fact, their average attendance of 25,346 is the third highest in the Championship, only behind Leeds United and Derby County, and is actually higher than seven clubs in the Premier League (Birmingham City, Fulham, WBA, Blackburn Rivers, Bolton Wanderers, Wigan and Blackpool). There is no sign of this slowing down with season ticket sales for the 2011/12 campaign already standing at a record high of 21,063, considerably more than the 19,250 the last time that Norwich were in the Premier League, even though prices have been raised by an average £1.50 a game and the starting age for adult concessions has been increased from 60 to 65.

Of the clubs averaging more than 20,000 in the Championship, Norwich have by far the highest capacity utilisation at 94%, which has raised the possibility of a stadium expansion. Although 1,000 seats were added last summer, the board has discussed a plan to increase Carrow Road’s capacity from 27,000 to 35,000, though this would only be considered if the club had two consecutive seasons in the Premier League. Although it could make the club self-sufficient, the expansion would cost £20 million, which would take nine years to repay, and the club would lose £1.4 million gate receipts from lost capacity during the building phase, so this would be a momentuous decision.

"Yellow and Green Army"

Alternatively, there would be the possibility of a sale and leaseback deal on the stadium, which would raise enough money to pay off the debts and leave a useful transfer budget. Carrow Road is valued at £32.9 million in the books, though the directors believe that the market value is higher. However, every club that has followed this route now regrets the decision. Mike Reynolds of the Norwich City Supporters’ Trust summed up the fans’ views, “It would be very much selling off the family silver - once it's gone, it is gone and you can't go back and use it as an asset.” Indeed, following the restructuring, Delia promised that the ground would “absolutely not” be sold.

Commercial income of £8.5 million is quite high for a Championship club, but is bolstered by £3.8m catering revenue. That may not be too surprising, given the owner’s day job, but it’s strange to think that last season this was more than twice as much as TV revenue, though the margins will not be quite so impressive.

The current shirt sponsor is insurance giant Aviva, the parent company of Norwich Union, who extended their three-year deal in the summer of 2009 to the end of the 2011/12 season. The value of the deal has not been divulged beyond the fact that is a “substantial seven-figure sum.” The kit supplier is Xara, though McNally has told supporters that there will be a new contract from next season.

Other commercial revenue comes from a variety of sources, including a joint venture for the hotel at Carrow Road, a security business and hosting events at the stadium, such as a George Michael concert.

On the cost side, the wage bill is the key factor in a budget that the chairman described as one that “will allow us to compete for a top six position.” As always, this is a balancing act between spending enough to compete at the top of the Championship, while not damaging the club’s long-term security if it fails to win promotion. It is clear that Norwich have made strenuous efforts to control their wages, as these have been steadily reducing since the last Premier League season from £16.9 million to £12.2 million, though the important wages to turnover ratio has increased (worsened) from 45% to 72% in the same period, as revenue has fallen at a faster rate.

This is not too bad, given the pervasive impact of the stratospheric wage inflation in the Premier League, “where the wages of excellence are considerable.” The accounts tell us that Norwich structured their contracts to reduce in the event of relegation, though interestingly only if the team did not win back promotion in the following two seasons. If the club does get promoted, this can also affect the wage bill through performance-related bonus payments: £1.7 million in 2005 and £0.9 million in 2010.

Norwich’s wage to turnover ratio is actually the sixth best in the Championship, while their wage bill of £12.2 million is one of the lowest, placing them 16th in the wages league. Although there is seemingly not much between each team with 15 of the 24 teams having a wage bill between £10 and £20 million, that can still provide a healthy competitive advantage, for example Reading enjoy twice the budget of Watford. Of course, these figures are all at least 12 months out of date, so the position may well be different this season.

Nor have Norwich City been big spenders in the transfer market. Over the last decade, their net spend has been flat with the only year where they had relatively large net purchases (of just £7 million) being the one that they spent in the Premier League. The fallow period in the Championship featured a series of net sales, totaling £16 million, and it’s only really in the last two years that Norwich have lived up to their own description in the accounts of being a “buying club.”

To be fair, the sales came during a period when the club’s debts prevented them from splashing the cash. As the finance director said at the time, “player trading is a fact of life in football and will be used to support both the business and development of the team.” Norwich have always claimed that they were working towards a situation where they did not have to sell players for financial reasons. After the debt restructuring, they have proved true to their word and have been the second highest spenders in the Championship this season, only surpassed by QPR. OK, the figures are not that high, but everything’s relative.

Like almost every other club in the Championship, Norwich have also made good use of the loan system, bringing in promising Premier League youngsters like Henri Lansbury (Arsenal), Dani Pacheco (Liverpool) and Sam Vokes (Wolves) for meaningful roles.

Some fans have questioned Norwich’s “prudence before ambition” policy. Although there is no doubting Delia’s passion for the club (“Let’s be having you!”), nor the millions she has put in, some would still prefer wealthier investors. However, McNally for one is supportive of the majority shareholder, “Delia Smith has made an enormous contribution to Norwich City Football Club and her part in ensuring our survival should never be underestimated.”

This is very much a case of caveat venditor (let the seller beware), as not all owners would be such selfless benefactors as Delia and her husband, who have not taken any salaries, dividends or interest from the club during their fifteen years at the helm. That said, they have repeatedly asserted that they would accept a suitable offer if they felt that it was in the best interests of Norwich City.

The other salient point is that it is not that easy to find an ideal investor with the right credentials. The club has been “committed to attracting new investors” since 2008 and even appointed professional advisors Deloitte at great cost to assist in the process in 2009. They identified more than 50 potential investors globally, speaking to possible candidates in America, Europe, Far East, Middle East, Russia an Britain, but none of them have come up with an acceptable offer, even though Norwich is a club in a large catchment area with substantial potential.

"Henri Lansbury - hair today, gone tomorrow"

There has been a view that the club is against foreign ownership, but Michael Wynn Jones has clarified the couple’s views, “You have to make doubly certain about the validity and intentions of any foreign investor. They too would be welcome if we were convinced that they subscribed to the values this football club has always maintained.”

Regardless, the closest the club has ostensibly come to an investment was a couple of years ago with local insurance tycoon, Peter Cullum, the executive chairman of Towergate Partnership, who offered to put in £20 million for new shares, which would then be used to buy new players. Apparently he did not want to buy out the existing shareholders, but was told that he would need to stump up £56 million for the club: £16 million for shares, £20 million to clear the debts plus the £20 million transfer fund. At this point, he walked away, observing that “the economic environment is simply not conducive to investing in an ailing football club.”

In any case, the question has to be asked whether the club is now still under pressure to find additional investors following the successful financial restructuring, as McNally recently stated that the seven-year plan does not include any external investment. Additional cash would certainly come in useful, whether it be to reduce debt, fund stadium expansion or indeed strengthen the squad, but it would appear that it is no longer a necessity.

"Russell Martin - eyes on the ball"

As a sign of confidence, Norwich have already forecast an improvement in next year’s financials: revenue to increase by at least £5 million (to £22 million); the biggest operating profit since 2007, the last year that the club received parachute payments from the Premier League; and net debt to reduce by at least a further £1 million. The club remains focused on paying down debts from the sale of non-core, non-football assets, while McNally said that they could be debt-free if they achieve the objectives laid down in the famous seven-year plan.

Of course, the price to be paid for success includes the possibility of larger clubs tempting away your prize assets, specifically the manager and star players. Norwich have already refused one club (Burnley) permission to talk to Paul Lambert, but if a larger club came knocking at the door, it would not be a massive surprise if such an ambitious coach were to exit stage left.

"Andrew Surman - all smiles"

Similarly, covetous eyes must have been cast on success stories like Holt, Hoolahan and young striker Chris Martin, to name but three. Fortunately, all of them have recently signed new deals with the former two extending their contracts to 2014. Of course, the club might still be tempted to cash in if the price is right, but they are no longer in a position where they have to sell.

The club has certainly come a long way since the players had to pay for their own flights to Blackpool for an away game. The new executive team has pulled them back from the financial brink, while the new football manager is poised to lead his team to a second successive promotion, this time to the Premier League. It’s still too early to say that they will reach their destination, but it’s fair to say that these Canaries have already taken flight.

Thursday, April 21, 2011

Despite a disappointing home defeat to Udinese last Sunday, this has still been a great season for Napoli, who currently lie second in the Serie A league table with five games remaining. Even though the scudetto is now probably beyond them, there’s still a slim chance that they could catch the leaders Milan, while qualification for the Champions League looks more than likely. The team has played its football at a fast tempo and with the intensity typical of manager Walter Mazzarri, a shrewd tactician and a powerful motivator, which has delighted the club’s passionate supporters.

The prolific Uruguayan striker Edinson Cavani has been the focal point of some exhilarating displays, scoring 25 goals already this season. His form has been so impressive that a newspaper from his homeland gushingly described him as Vesuvius, a comparison that club president Aurelio De Laurentiis smilingly corrected, “The volcano is dormant, while our striker is very much active.” Equally impressive in a fluid tridente have been the Slovak Marek Hamsik, a skilful midfielder, and the pacy Argentine schemer Ezequiel Lavezzi.

Of course, this is not the first time that South Americans have played a vital role for the Partenopei and this season’s title race with Milan is reminiscent of the glory days of the late 80s, when Napoli became the first mainland southern club to win the league in 1986/87, a triumph that they repeated three years later. At that time, they were inspired by the legendary Maradona, who formed a lethal partnership with Brazilian forward Careca. Ably supported by Italian internationals Ciro Ferrara, Salvatore Bagni and the aptly named Fernando De Napoli, that team also won the UEFA Cup in 1988/89, beating Stuttgart 5-4 over two legs in the final.

"Lavezzi shows some love"

Napoli’s modern day success has been matched by their achievements off the pitch, as they have reported profits four years in a row, a rare feat indeed for any football club. The press has elected the club “queen of the balance sheet” (the Italian word for club is feminine), while saying that its accounts are “Champions League standard”. Given how many clubs in Europe’s flagship competition make hefty losses, this is perhaps not the best analogy, but we understand what they mean and they’re right: Napoli’s progress in recent years has been remarkable and all the more impressive, as it has not been at the price of their finances.

Their accomplishments off the pitch have been maintained despite De Laurentiis funding significant investment in the squad since Napoli returned to Italy’s top tierin 2007 in an ambitious attempt to catch up with the leading clubs. In fact, according to respected website Transfermarkt, Napoli have spent more than any other Serie A club in the last four years with net spend of €118 million, just ahead of Juventus. The fact that they have still managed to balance their books (and more) in the face of such heavy spending is testament to their ability to keep a lid on the wage bill, while boosting revenue, most notably in the commercial arena.

This financial fortitude will come as a great relief to the club’s fans who had to endure so many trials and tribulations after the turn of the Millennium. Following the departure of extravagant longtime president Corrado Ferlaino in 1994, Napoli’s financial woes were laid bare, leading to a rapid fall from grace as a succession of different owners tried to stem the losses. This had an inevitable impact on the team’s performances, leading to relegation to Serie B in 1997/98. Although they managed to return to the top flight two years later, they were again relegated the following season. The endless legal battles among the owners took their toll, culminating in the club being declared bankrupt by a local tribunal in August 2004 with debts of €79 million.

The Italian football federation ruled that Napoli could only survive professionally if an owner started a new franchise for the club in Serie C1 (the third tier of Italian football), otherwise the club would have to compete in amateur competitions. Luciano Gaucci, the owner of Perugia, tried to put together a rescue plan, but lacked the resources to do so, leaving the way clear for Aurelio De Laurentiis to save the club by paying the courts €30 million, ensuring that professional football was kept alive in his home city.

"Meet El Presidente"

“DeLa” is a successful movie producer, nephew of the celebrated Dino De Laurentiis, but he was confronted by a desperate situation: no equipment, no training ground and crucially no players. Furthermore, the new club had not been allowed to retain the name SSC Napoli, so was given the (frankly awful) name of Napoli Soccer.

Nevertheless, where there’s a will, there’s a way and “DeLa” acted quickly to address the club’s urgent problems. He injected money, recruited Pierpaolo Marino from Udinese as sporting director and hired the hard-working Edy Reja as coach. It was the beginning of a new era.

Despite the chaotic circumstances at the start of the season, Napoli only just missed out on promotion from Serie C1 in 2004/05, losing to Avellino in the promotion play-off, but they absolutely stormed the league the following year, winning the title by 13 points. A second successive promotion followed the next season, when they went up from Serie B along with Juventus and Genoa.

They finished in a highly creditable eighth place in their first season back in Serie A, though De Laurentiis admitted that this was in no small part due to the Calciopoli match-fixing scandal that saw Juventus, Milan, Lazio, Fiorentina and Reggina punished. Having qualified for the 2008/09 UEFA Cup, albeit via the Intertoto Cup, and this season’s Europa League, following the more legitimate route of sixth place in Serie A, Napoli are well and truly back.

"Mazzarri encourages the troops"

When De Laurentiis took over the club, he put into place a project to return Napoli to Serie A in five years. As it turned out, they comfortably beat that target, so this can be described as a huge success. However, this did not stop the owner from replacing the popular Edy Reja with the former coach of the national team Roberto Donadoni in March 2009, after a worrying run of form.

This was a sign of things to come, as De Laurentiis embarked on a second cycle that summer, “Tonight starts my new five year era at the club. This is a key time for Napoli and we can’t afford any more errors.” First, he fired respected sporting director Marino, whose spectacular successes in the transfer market like Hamsik and Lavezzi were not enough to compensate for a series of poor purchases. In his place, the club brought in Riccardo Bigon, whose father Alberto Bigon was the coach who guided Napoli to their second scudetto.

Then, it was the turn of Donadoni to get the chop, after the president admitted he had made a mistake in dismissing Reja, with former Sampdoria coach Walter Mazzarri joining the new project. With typical understatement, De Laurentiis said that Mazzarri was “far better” than the then Inter manager Jose Mourinho, but it has to be remembered that he had also said Reja “must stay at Napoli for the rest of his life.”

That said, it would be a brave man that dared to carp at De Laurentiis’ deeds, as he has been an almost exemplary owner for Napoli, completely rebuilding the club in just a few years, so much so that they are one of only two teams in Serie A that made profits in each of the last two seasons (the other one is Catania), generating a total of €11 million. That’s some achievement, when you consider that the only team ahead of them in the league (Milan) lost a combined €77 million in the same period, while the team just behind them (Inter) made staggering losses of €223 million.

While it’s true that money does not always buy success, it sure helps, so for Napoli to be doing so well with such a low budget is praiseworthy indeed. Very few clubs manage to balance success on the pitch with solid financials, so Napoli deserve a big pat on the back, even more so given the challenges faced by Italian clubs, which have had to cope with falling crowds, accusations of corruption and occasional violence and racism, not to mention an over-reliance on television money.

However, Napoli have managed to buck the trend, making profits in each of the last four years. The last time that they made a loss was when they were in Serie C1 in 2005/06. This is even more impressive, when you consider that they have achieved this without the benefit of Champions League money and relatively low profits on player sales, e.g. €6.6 million in 2009/10 (Mannini to Sampdoria €4.9 million, Contini to Real Zaragoza €1.7 million) and €10 million the previous year. It is true that the continued investment in players reduced profit last season from €10.9 million to €0.3 million, as both wages and player amortisation significantly increased, but that’s still pretty good, considering that 16 of the 20 Serie A teams made losses in the same period.

Napoli’s revenue of €92 million is the sixth highest in Italy, on a similar level to Fiorentina and Lazio. However, it’s less than half the revenue generated by the traditional big four clubs, mainly due to their very high individual television deals. Inter lead the way with €225 million, followed by their local rivals Milan €208 million and Juventus €205 million. On the other hand, Napoli’s revenue is in turn more than twice as much as competitors like Genoa, Udinese and Sampdoria.

It also puts Napoli in 29th position in the Deloitte Money League, which ranks European clubs in order of revenue, a fall of one place over the previous season, just below clubs of the stature of Borussia Dortmund, Valencia, Benfica and Werder Bremen.

This is obviously fairly good by most standards, but the European league table also reveals the significant monetary advantage enjoyed by the leading teams with Real Madrid and Barcelona earning four to five times as much income as a club like Fiorentina. To place Napoli’s recent achievements into context, when they lost out to Liverpool in this season’s Europa League, they were facing a team whose annual budget is two and a half times as high as their own.

Two points stand out from the analysis of the revenue mix. Commercial revenue is relatively high, representing 41% of total revenue, which is one of the largest proportions of any Italian club, only surpassed by Siena (48%), but that is more due to the Tuscan club’s incredibly low match day revenue. In turn, this means that Napoli’s reliance on TV income is far lower than other clubs at just 43% of total revenue, which is the lowest in Serie A. As a comparison, the proportions at Juventus, Inter and Milan are considerably higher: 65%, 61% and 56% respectively.

Those of you who keep up with financial affairs may be wondering why the revenue figures used in my Money League are lower than those used in the analysis recently reported by La Gazzetta dello Sport. The reason for the difference is that Italian accounts report gross revenue, while Deloitte show the net income in their annual survey. In order to be consistent with other countries, I have adopted the Deloitte approach in my analysis, so have excluded the following: (a) gate receipts given to visiting clubs €2.7 million; (b) TV income given to visiting clubs €8.8 million; (c) revenue from player loans €1.2 million. Adding the €12.6 million adjustments to the €91.6 million in my analysis gives the €104.2 million reported in Italy.

Napoli’s revenue growth shows just how far they have come since the dark days of C1. In fact, their revenue is more than eight times higher with significant increases in all the revenue streams: match day €4 million to €14.5 million, commercial €5.1 million to €37.7 million and broadcasting €2 million to €39.4 million. The huge differences between each division can clearly be seen in the graph above, first in 2007 after the promotion to Serie B, then the following year with the elevation to Serie A.

The commercial income of €38 million is the most impressive aspect of this revenue growth, reflecting Napoli’s “modern and ambitious plan” to increase their “brand equity”. This is most obviously reflected in the enormous amount of branded merchandise that is available, which clearly demonstrates both the club’s future direction and the supporters’ appetite for all things Napoli.

According to Deloitte, Napoli’s commercial revenue is the 20th highest in Europe at about the same level as Roma, though it is still more than €20 million lower than Milan, who generate most commercial income in Italy, so there is still room for growth.

Napoli have a veritable raft of institutional sponsors, official partners and commercial partners, though their main official sponsor is Acqua Lete, who are paying €5.5 million for the current season. This is lower than Milan (Emirates €12 million), Inter (Pirelli €9 million) and Juventus (BetClic €8 million), but is higher than Roma (Wind €5 million) and Fiorentina (Mazda €4 million). There are rumours that De Laurentiis is looking for a new sponsor to pay €9 million a season, which is ambitious, but is a clear sign of intent (and would have the advantage of replacing the unpopular red Lete logo).

Kit supplier Macron replaced Diadora in 2009, signing a three-year deal worth around €4.7 million a season, which is a fair bit lower than the leading clubs: Milan – Adidas €13 million, Juventus – Nike €12 million, Inter – Nike €18 million. If the commercial aspirations are to be met, this is one area that will have to be tackled.

Despite the growth in commercial revenue, television remains the most important revenue stream, but only just, at €39 million, which is entirely derived from the domestic deal. The importance of Champions League TV revenue can be seen in the graph above, as it contributed an average of €29 million for the four Italian qualifiers (Inter €49 million, Milan €24 million, Fiorentina €22 million and Juventus €21 million). This explains virtually all of the difference in television revenue between Napoli and Fiorentina (€65 million).

To a lesser extent, this factor also explains most of the €3 million reduction in Napoli’s television revenue in 2009/10 from €42 million to €39 million, as the previous year included revenue from competing in the UEFA Cup.

The lack of a level playing field financially in Italy up to now has largely been due to the vast differences in the size of individual TV deals, where Juventus, Inter and Milan have been earning €90-100 million a season – more than twice as much as the likes of Napoli. After many years of protests at this inherent unfairness, this structure was replaced at the start of the current season with the move to a centralised collective deal. The total money guaranteed by exclusive media rights partner Infront Sports will be approximately 20% higher than before at over €1 billion a year, but it is still unclear what the impact will be on the revenue at individual clubs.

There is a complicated distribution formula, which will still favour the bigger clubs, though there is likely to be a reduction at the top end. Under the new regulations, 40% will be divided equally among the 20 Serie A clubs; 30% is based on number of fans (25%) and the population of the club’s city (5%); and 30% is based on past results (5% last season, 15% last 5 years, 10% from 1946 to the sixth season before last).

Of course, Napoli’s “ability to attract the paying public” (per the accounts) is also a key revenue driver. Although their match day revenue of €14.5 million (after deducting €2.7 million given to away clubs) is on the low side, this is not atypical for Italy. In fact, Napoli’s gate receipts are not very far behind Juventus €17 million and Roma €19 million, though Inter and Milan are much higher with €39 million and €31 million respectively.

The average attendance last season of 40,797 was the fourth highest in Italy, only behind Inter, Milan and Roma, and was actually the 30th highest in the whole of Europe, ahead of clubs like Sevilla, Tottenham Hotspur, Lyon and Porto. Signs of the fans’ loyalty abound, such as the 51,000 crowd that they attracted for their final game in Serie C1, which unsurprisingly is a record for that division. More recently, they took 15,000 fans with them when they played a match in Bologna, while their home average attendance this season has risen 9% to 44,509, including a 58,666 crowd for the match against Juventus.

Napoli play their home games at the imposing Stadio San Paolo, which has a capacity of 60,240 and is the third largest stadium in Italy after San Siro in Milan and Stadio Olimpico in Rome. As is the norm in Italy, the ground is not owned by the club, but by the local council, which is paid nearly €600,000 rent a year.

"The sound of the crowd"

This is in marked contrast to their European peers, who have a business model that relies on much higher match day revenue. As an extreme example, Real Madrid’s annual match day income of €129 million is almost exactly nine times as much as Napoli, while English clubs also earn considerably more, e.g. Manchester United €122 million and Arsenal €115 million. Now I’m not suggesting for a minute that it would be feasible for Napoli to attain such levels of revenue, but there is clearly some scope for improvement here, especially if they can adjust the customer mix to include more premium seating.

Some might argue that low pricing at matches is a good thing and has not harmed the financials of German clubs, which I would agree with up to a point, but it is worth noting that match day revenue still tends to be higher in Germany than Italy, e.g. Schalke 04 and Borussia Dortmund, who are analogous to Napoli in many ways (large, passionate crowds), earned €25 million and €23 million respectively last year, nearly twice as much as the Partenopei’s €14 million. Furthermore, Bayern Munich (€67 million) and Hamburg (€49 million) earn a great deal more.

Even though Napoli’s revenue growth has been striking, what is really driving their excellent profits is their ability to keep costs under control, especially the wage bill. Although wages increased 25% last season to €39 million, the important wages to turnover ratio is still only 42%, which is astonishingly low for a major football club and way below UEFA’s recommended maximum limit of 70%. As a comparison, the five Italian clubs with higher revenue than Napoli all have significantly worse ratios: Inter 104%, Milan 83%, Juventus 67%, Roma 82% and Fiorentina 67%.

This reflects the tough wage policy implemented by De Laurentiis, which many of his players have discovered to their chagrin. For example, when Lavezzi asked for a pay rise a couple of years ago, the owner gave him short shrift, “If an actor were to behave like this, I would eat him alive.”

Napoli’s wage bill of €39 million is the seventh highest in Italy, but it’s miles behind the “big boys”: Inter €234 million, Milan €172 million, Juventus €138 million and Roma €101 million. According to the annual salary survey published by La Gazzetta dello Sport, the net cost of Napoli’s first team squad is just €28 million and only four players earn more than €1 million a season: Cavani €1.8 million, Andrea Dossena €1.5 million, Lavezzi €1.4 million and Hamsik €1.3 million.

In fact, La Gazzetta also amusingly pointed out that the €11 million total cost of Napoli’s starting XI is less than the €12 million cost of Milan’s Zlatan Ibrahimovic on his own (salary €9 million, bonus €3 million).

Of course, a club’s total wage bill does not just comprise players’ salaries, though this was the largest element of Napoli’s costs at €29 million. In addition, there were €4.2 million for salaries of coaches and €1.6 million bonuses.

To strike a cautionary note, it is entirely possible that wages will increase further in the future, as the club attempts to retain its crown jewels. Indeed, the accounts specifically mention that these costs will rise as part of the company’s strategic investment, though they argue that any growth will be sustainable. It is also true that sporting director Bigon has been working to move on some squad players, which will be of benefit to the wage bill.

"Walter Gargano - Napoli's other Uruguayan"

Similar to salaries, the strengthening of the squad has resulted in a 45% increase in player amortisation from €28 million to €40 million, which is more or less the same level as Milan and Juventus, but below Inter (€65 million), so is on the high side for a club of Napoli’s stature.

For those not overly familiar with accounting methodology, amortisation is simply the annual cost of writing-down a player’s purchase price. Almost all clubs book this evenly over the life of a player's contract, but Napoli use an accelerated amortisation method, which I have not seen in any other club that I have reviewed. For example, in a five-year contract the amortisation rates are: 40%, 30%, 20%, 7% and 3%.

To illustrate how this works, when Fabio Quagliarella was signed for €18 million on a five-year contract, the entire transfer fee was not booked immediately, but was reflected in the profit and loss account via amortisation with €7.2 million booked in 2009 (40% of €18 million). Thus, the total cost of player purchases does not fully show up in the expenses straight away, but increased transfer spend will ultimately feed through to the accounts as a result of higher amortisation.

Therefore, the fact that amortisation increased by so much (from €4 million in 2007 to €40 million in 2010) would imply that Napoli have been spending big in the transfer market and, as we saw earlier, that is indeed the case. Having spent virtually nothing in the six years up to 2006/07, ever since the club returned to Serie A the taps have been turned on with net expenditure (purchases of sales proceeds) of €118 million. In fact, Futebol Finance placed Napoli in ninth place in their European league of highest spenders in the transfer market in 2009/10.

One of the reasons that former sporting director Pierpaolo Marino was let go was his patchy record in spending the small fortune given to him by De Laurentiis. Although he managed to locate some gems during his tenure, paying just €5.6 million for Lavezzi and €5.5 million for Hamsik, there’s little doubt that many of his purchases failed to live up to their potential with the likes of German Denis, Jesus Datolo and Matteo Contini being moved on at a loss. The owner further complained that “we still have many players here as a result of the errors of previous mercati. Why do we keep players here when we know we don’t have any use for them?”

Riccardo Bigon, the new sporting director, has made an excellent start by making possibly the deal of the season, when he secured the services of Cavani from Palermo’s volatile president Maurizio Zamparini for the ridiculously low price of a €4 million loan fee with an option to buy next summer for €12 million. After a relatively quiet January transfer window when Napoli “only” purchased Victor Ruiz from Espanyol for €6 million (plus Datolo) and Giuseppe Mascara from Catania, all eyes will be on the Partenopei’s dealings in the summer.

In spite of this lavish expenditure on new players, Napoli are in a very good debt position. In fact, they now have no bank debts at all, after eliminating the €32 million balance in 2005, and actually have cash balances of €14 million. They do owe €14 million to the parent company Filmauro (owned by De Laurentiis) and €4 million to shareholders, but this is not a major issue. This enviable position is a sign of the club’s self-sufficiency and is in marked contrast to Milan and Inter, who have large bank debts of €164 million and €71 million respectively, which represents two thirds of the Serie A total of €352 million.

However, one financing mechanism actively embraced by Napoli is stage payments on transfer fees, a device that is very widely used in Italy. This helps explain why Napoli can afford their sizeable transfer expenditure in recent years, as the net transfer fees payable to other clubs have risen to €36 million (payables €48 million less receivables €12 million). As an example of how this works, the transfer fee for Quagliarella was €18 million, but Napoli still owed Udinese €12.5 million as at 30 June 2010 with the following payment schedule: December 2010 €4.9 million, March 2011 €2.1 million, December 2011 €3.85 million and March 2012 €1.65 million.

Nevertheless, Napoli have one of the strongest balance sheets in Serie A with net assets of €25 million, only behind Fiorentina, Juventus, Udinese and Cagliari. What is even more impressive is that this position has very largely been reached without the owner having to cover shortfalls by providing cash injections, as is the case at many other clubs. Furthermore, the club’s profits have been used to reinforce reserves, rather than being distributed to the owners.

So what of the future?

Like every other ambitious club, Napoli will have to meet the challenge of keeping salaries at a low level, while seeking to make further progress in terms of sporting results. It seems likely that costs will continue to rise, especially salaries and player amortisation, as a consequence of strengthening the squad and extending player contracts, so this will be more difficult than in the past. That said, if Napoli do qualify for the Champions League, that could be worth an additional €40 million revenue, mainly from UEFA’s central distributions, but also via more gate receipts and better commercial deals.

In that eventuality, the question is how much of the extra funds Napoli will choose to spend. The money could be used to recruit better players, but this might place a risk on the club’s finances, as there is no guarantee that the European adventure will last more than a single season. This is similar to the dilemma facing Tottenham this season.

"Marek Hamsik rocking the hedgehog haircut"

The question that is probably uppermost in the minds of Napoli fans is whether the club can hang on to its stars. There has been almost constant speculation about Hamsik, Lavezzi and Cavani, who could certainly earn more money elsewhere. The last thing that De Laurentiis would want is for Napoli to acquire the reputation of being a selling club, but the club might be tempted to cash in on its assets, especially if the players themselves want to leave.

Cavani himself has been quoted recently as saying that the only club he would leave Napoli for is Real Madrid, but no less than an authority than Jose Mourinho commented, “Edinson Cavani, Marek Hamsik and Ezequiel Lavezzi are great players in an important club. The side wants to grow, not sell and for this reason I don’t go looking for their players.” However, things can change quickly in the football world, so it would not be a massive surprise to see one of them leave, especially as their value in the transfer market (€147 million per Transfermarkt) is considerably higher than on the balance sheet (€50 million).

On the other hand, De Laurentiis may be tempted to use the Champions League war chest to take the team to the next level, especially as the team seems to struggle when one of the tridente is missing. The president has already announced the purchase of two promising players: Slovenian striker Tim Matavz from Groningen and Argentine defender Federico Fernandez from Estudiantes. Many other potential purchases have been mentioned in dispatches, the most frequent names being Udinese’s Gokhan Inler and Villarreal’s Borja Valero.

"Christian Maggio - flying down the wing"

Any activity in the transfer market will be partly determined by the coach. Although there have been a few whispers that Mazzarri interests Juventus, De Laurentiis has nipped the rumours in the bud, “He still has three years left on his contract. You (journalists) will still be dealing with him for a while.”

However, it’s unlikely that Napoli will suddenly go crazy with their expenditure. De Laurentiis recently stated that the club would “not change its initial plan of gradual growth.” When he was coming under pressure to buy more players in the January transfer window, he argued, “The best signing was made by those clubs that spent the least, thereby keeping their books in order, in line with the financial fair play rules.”

The president of the Italian Football Federation, Giancarlo Abete, recently praised Napoli as an example for other clubs to follow for their ability to compete with the Northern giants while balancing their budget. He further observed that they were already in line with UEFA’s upcoming Financial Fair Play initiative: “Someone like Aurelio De Laurentiis, who has been able to carefully plan for the future, can calmly approach the new environment, keeping costs under control.”

"Paolo Cannavaro - leading by example"

This is one reason why the club is seeking to upgrade its academy, so that homegrown youth players can progress to the first team instead of the club continually having to “gamble” on bringing in new players at exorbitant prices. Indeed, De Laurentiis has spoken of a desire to emulate Barcelona (as indeed have many other owners), but clearly such a project takes time to come to fruition.

In the meantime, there is still all to play for this season. Although the president claimed that he could not compete with the Berlusconis of this world, the fact is that Napoli have done a pretty good job of proving him wrong with their thrilling challenge for the title. As a film producer, De Laurentiis will be very aware that a film does not always have a happy ending, but Napoli’s fans can certainly dream of an exciting future.

Praise for The Swiss Ramble

"Blogger of the Year 2013 - It’s testament to the effect that Kieron has had on the blogosphere that so many fans take his word as gospel. Putting to use his career in the world of finance, his insights into balance sheets and simple explanations of complex ideas appeal to the hardcore financial whizz and casual fan alike." - The Football Supporters' Federation